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Yields Poised to Turn Higher

David Becker
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Interest rates moved down in the first half of the year, but this trend could be reversing as the economy and labor market improves. Jobless claims have fallen steadily all year and Goldman Sachs (NYSE:GS) upgraded their economic outlook on Monday, citing an improved employment situation. Rate generally move higher as an economy improves, but the first half of the year has seen declining yields.

The 10-YR Treasury Yield is breaking below the lows extending back to July and immediately recovering to forge a bear trap. The early June surge is impressive and follows through above resistance from the May highs would provide another signal that the five-month downtrend is reversing for yields.

Yields and bond prices move in opposite directions. This means an upside breakout in yields would be bearish for bonds. Interest rate sensitive stocks and yields inversely correlated, an upside breakout in the 10-YR Treasury Yield would be negative for interest rate sensitive stocks.

The 30-YR Treasury Yield hit resistance in the 3.5% this week. Momentum on the long end of the curve has turned positive for yields, with the MACD (moving average convergence divergence) index generating a buy signal. This occurs when the spread (the 12-day moving average minus the 26-day moving average) crosses above the 9-day moving average of the spread. The index moved from negative to positive territory confirming the buy signal.

The RSI (relative strength index) also moved higher with price action reflecting accelerating positive momentum for yields. The RSI is printing near 58, which is on the upper end of the neutral range.

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